What does „America First“ (again) mean for the EU, US tax reform and international trade?

Since last week, it has been clear that Donald Trump will become the 47th President of the USA. During the election campaign, he announced the United Staates is going to take a protectionist stance. What does this mean for the EU and international trade in terms of customs duties, the Ukraine conflict, Iran policy, free trade agreements and climate policy?

So far, it is impossible to predict which of his campaign promises he is actually going to implement and how exactly this will turn out. The announcements were massive; however, it remains questionable whether he will actually implement them with the same stringency.
It is therefore all the more important for companies to start planning their foreign trade strategies now in order to prepare for possible scenarios. In our opinion, the following aspects are relevant:

New customs duties

Trump has announced massive new import tariffs. These are expected to amount to at least ten percent. In some cases, up to 20 percent was mentioned for EU products. For goods from China, the tariffs are expected to be as high as 60 percent. In addition, “punitive tariffs” against EU goods were repeatedly mentioned. The EU had already reacted during the election campaign and also announced countermeasures in the form of tariffs if these punitive tariffs should be imposed.

Countries with a significant trade surplus, such as Germany, are a particular focus for President Trump. The automotive industry as well as the chemical and food sectors, are likely to be particularly affected.

In a study, the German Economic Institute calculated that the new tariffs would cost Germany around 180 billion euros and that German GDP could be 1.5 percent lower at the end of Trump’s second term in office.

It is unclear how the announced punitive tariffs will exactly be determined. However, it would be obvious to base the calculation not on the country of dispatch, but on the goods’ origin in terms of trade policy. This has been the case in the past. Such approach would give companies a little leeway, provided they have the opportunity to influence the goods’ origin. Inadmissible circumvention measures must always be avoided. 

Ukraine conflict

Trump had announced in advance that he would resolve the conflict within 24 hours. It remains to be seen whether this is realistic. However, he has made it clear that no further comprehensive military aid can be expected under his leadership.

Furthermore, a short-term end to the conflict would only be possible if Russia’s interests were sufficiently taken into account in the “peace solution”. Russia would therefore have a strong position. Thus, a cessation would probably not fully reflect the current interests of the EU and Ukraine.

This is likely to lead to tensions and differences in the EU and US sanctions policy towards Russia. Uncertainties and possible competitive disadvantages for EU companies would arise if US companies were once again permitted to do business with Russia, while such business continues to be sanctioned for EU companies.

Free trade agreement

The “America First” concept and protectionist approaches (import tariffs) interferes with global, balanced trade and thus the conclusion of a free trade agreement with the EU.

At the same time, Trump renegotiated NAFTA during his first term in office and replaced it with the United States-Mexico-Canada Agreement (USMCA). The USMCA provides for a review after six years, i.e., within the second term in office. This agreement, which is particularly important for the automotive industry, could then undergo pro-American changes to the detriment of Mexico as a production location.

This is an opportunity for the EU to strengthen its trade relations with Latin American countries. However, the free trade agreement with MERCOSUR, which is ready to be signed, is likely to fail due to French resistance.

US tax reform and policy

The outcome of the 2024 US presidential election will have an extraordinary impact on the future of tax reform and policy, including the unprecedented fiscal challenge the United States is facing in 2025.
It is important to note the US Congress, not the president, has the power to tax. Once the US Congress drafts and passes a bill, it goes to the president for signature or veto.

As expected, the US Senate control will flip to Republicans in the 119th Congress holding a majority of at least 52-48.

For control of the US House of Representatives, the GOP has performed well in many key races, flipping several important seats. However, there are several races that are still too close to call which will determine the balance of power in the House of Representatives. However, we believe the Republicans are close to clinching control of the House of Representatives, a critical element for President-elect Donald Trump to advance his agenda when he returns to the White House in January 2025. Republicans need 218 seats of the 435 member House of Representatives to remain in control of the House of Representatives. As of the date of this publication, the Democrats have won 203 and the Republicans have won 213 seats. Republicans need to win 5 seats of the remaining 19 seats remaining to take control of the House of Representatives. The race for the House of Representatives is excepted to be close and it take days or weeks to count enough votes to determine which party won.      

The future of tax reform hinges on the outcome of those few open House races. If Republicans are able to retain control of the chamber, they will be able to use reconciliation to extend the Tax Cuts and Jobs Act (TCJA). If Democrats become the majority party, any tax reform will likely need to be a bipartisan effort.

The imminent need for tax reform in 2025 is largely due to expiring TCJA provisions. The impact of a potential lapse would be significant and widespread, affecting almost all individual and business taxpayers. Absent Congressional action:

• Individual taxpayers will see a fundamental change in their tax regime, resulting in meaningful increases in tax liabilities for the majority of taxpayers;
• Businesses will continue to grapple with the trio of recently altered TCJA provisions that were addressed in the bipartisan tax bill that failed to advance in the Senate this summer;
• Pass-through entities will lose the 20 percent qualified business income deduction; and
• The US federal estate tax exemption will be halved.

US Tax reform possibilities

US Tax reform in a unified government:
If Republicans capture the House, the United States will have a unified government – when one party controls the White House and both chambers of Congress. When this occurs, the controlling party can use budget reconciliation to pass a tax bill. Reconciliation bills can be passed quickly, as they are not subject to Senate filibuster rules. The last two major tax-only bills were passed using reconciliation - Republicans passed the TCJA in 2017, and Democrats passed the Inflation Reduction Act (IRA) in 2022.

Tax reform in a divided government:
If Democrats gain control in the House, the United States will have a divided government – when one party controls the White House and a different party controls at least one chamber of Congress. Under these circumstances, passing legislation must be a bipartisan effort.

There are sharp contrasts between Democratic and Republican approaches to tax policy, as well as variances in priorities and principles within each party. However, there is general agreement on the largest portion of the largest expiring provision – ensure there is no increase in income tax for individuals making under $400,000 (and married individuals filing jointly making under $450,000). 

Policymakers are likely to face challenging negotiations on what many will consider the biggest “must pass” bill of 2025. While the shape and duration of any potential tax reform is still unknown, if we have a divided government, we will be able to eliminate some of the more partisan proposals originating on both sides of the aisle. It’s possible we could see a substantial and permanent bipartisan tax bill; however, it’s more likely Congress will find consensus around shorter-term compromise that will run through the midterms or next presidential election cycle. Still, while the ramifications of a TCJA expiration should force legislative action, taxpayers should also prepare for the possibility Congress will be gridlocked, unable pass any tax reform bill before the expirations take effect.
 

Climate policy

Trump promises to facilitate the extraction of fossil fuels (gas, oil). This plan contradicts the EU’s Fit55 program, which is aimed at achieving climate neutrality. Consequently, the American measures could also impair the acceptance and effect of EU climate protection regulations such as CBAM and EUDR and put European companies at a competitive disadvantage.

Conclusion: There will be comprehensive changes with massive effects.

Companies should therefore explore all legal options. In addition to business decisions, this also includes the consistent use of customs authorizations in order to save duties. For example, it may be possible to avoid duties through customs suspension procedures (inward processing, customs warehouses), alternative, permitted origins of goods, new delivery routes or different, correct customs tariff numbers. Companies should review their processes accordingly, for example with a risk analysis, which we are happy to assist with.

Baker Tilly is going to closely monitor and report on further developments on its website.